Dept. of Ag & Resource Economics and Centre for the Study of Co-operativesUniversity of Saskatchewan

May 11, 2018

Keri Jacobs, Asst. Professor of Economics, Iowa State University

Local co-operatives merging, acquiring assets from independents

Result is fewer co-ops over time, but not fewer locations

High-profile co-op mergers in Iowa (Landus), Nebraska (CVA), SD & ND (Agtegra)

Environment of concern about market power

1980s: Financial troubles, no appreciable change in locations (private acquisitions), mirrored loss of farms during period

1990s: HTA contract debacle forced restructuring

Current: Recent uptick in activity, typically “mergers of equals”

• Approx. 50 G&FS co-ops (aka mixed)

• a few single locations remain

• Largest (Landus, in black) has 70+ locations and annual revenues > $1b

Source: Iowa Institute for Cooperatives, May 2018

DriversAccess to strategic assetsSuccession and retention, access to talented GMEnhanced operational efficiencyAccess to capitalMarket protection for producers

Nearing tolerance threshold?Members weary and wary

Does firm performance improve post-merger?

Profit margin = gross profit / sales

Return on sales = local profits / sales

Return on assets = local profits / fixed assets

Return on equity = local profits / total equity

Asset Turnover = sales / total assets

Operational expense efficiency = op exp / gross margins

Labor expense efficiency = local profits / personnel exp

Members’ share of total equity = allocated equity / total equity

Members’ share of local equity = allocated equity / local equity

Should we care?

Profit margin = gross profit / sales

Return on sales = local profits / sales

Return on assets = local profits / fixed assets

Return on equity = local profits / total equity

Asset Turnover = sales / total assets (-0.17 to -0.21)

Operational exp. eff. = op exp. / gross margins (-0.17 to - 0.27)

Labor exp. eff. = local profits / personnel exp. (0.19 – 0.26)

Members’ share of total equity = allocated / total equity

Members’ share of local equity = allocated / local equity (-0.17 to -0.21)

Member heterogeneity – can you be ”the co-op” for all?

Member perceptions of value proposition – the great balancing and education act

Co-ops who hang the value of consolidation on efficiency and performance have a post-merger problem

Board culture and membership culture

Early joint work with Drs. Georgeanne Artz and Wendong Zhang, Iowa State University

Observed consolidation in the grain marketing industry – all levels of the supply chain Fewer marketing firms, but not necessarily fewer grain-buying

locations

“Co-ops are getting too big.”

“There’s less competition for grain.”

What, if at anything, has been the impact of consolidation on grain bids to producers? Is there evidence of market power?

Are co-op and independent bids systematically different?

Co-op consolidation data since 1979 Can observe locations’ ownership over time “Markets” with more/less concentration of grain buyers

Geograin Data Weekly corn and soybean bids from grain receiving locations

in Iowa (co-ops and independents): June 1998 – Nov 2014 Price bids include basis and contract price 393 markets in Iowa “Market” factors, i.e., rail and river loading, processor, feed mill

Currently match 264 of our 540 co-op locations to Geograinbid data

Interesting questions related to consolidation

Spatially: across markets, do we identify differences in bids that are related to the degree of firm-level competition for grain? (monopsonistic spatial pricing evidence) Do markets where co-ops compete with independents have ‘better

bids’ than markets without co-ops? Do markets where co-ops compete with other co-ops have

better/worse bids than?

Temporally: within markets, do we identify differences in bids that are related to firm size, co-op consolidations and acquisitions? Do relative bids change over time as a result of co-op

consolidations and acquisitions?

Simple model: 𝑎𝑎𝑎𝑎𝑎𝑎 𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚 𝑏𝑏𝑏𝑏𝑏𝑏𝑖𝑖,𝑡𝑡 = 𝛼𝛼 + 𝑋𝑋𝑖𝑖,𝑡𝑡′ 𝛽𝛽 + 𝜇𝜇𝑖𝑖 + 𝑎𝑎𝑖𝑖,𝑡𝑡 RE model with monthly dummies, weekly price data

Results from the model using 2002 data that include ‘competition’ in a certain radius and firm size are anomalous

Simple model: 𝑎𝑎𝑎𝑎𝑎𝑎 𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚 𝑏𝑏𝑏𝑏𝑏𝑏𝑖𝑖,𝑡𝑡 = 𝛼𝛼 + 𝑋𝑋𝑖𝑖,𝑡𝑡′ 𝛽𝛽 + 𝜇𝜇𝑖𝑖 + 𝑎𝑎𝑖𝑖,𝑡𝑡When ‘firm size’ and competition indicator variables are

dropped, the results using 1999 – 2014 data make more sense

Why do cooperatives offer significantly lower corn and soybean prices? How does this inform the impacts of consolidation on producers?Competition in a local area seems to be generating

lower commodity prices, not higher. What are we missing or not controlling for? Is there a reason to think that this type of study

cannot be used to answer the market power question?How much can we expect to gain from a more

sophisticated (spatial) analysis?

KERI L. JACOBSkljacobs@iastate.edu